MEMORIAL UNIVERSITY OF NEWFOUNDLAND ECONOMICS (Economics 4120 WINTER )

MEMORIAL UNIVERSITY OF NEWFOUNDLAND ECONOMICS (Economics 4120 WINTER 2012-2013) Course Name Applied Welfare Econ & Cost Bene t Analysis Instructor Roberto Martínez-Espiñeira E-mail rmartinezesp@mun.ca O ce AA 3087 Tel 864 3676 Website http://www.ucs.mun.ca/~rmartinezesp Timetable slot 13 Mon&Wed 2:00-3:15 pm Classroom A1045 O ce hours TUE 1:30 to 4:00, WED 11:45 to 13:15, or by appointment 1 Textbooks The main textbook you would want to consult is: Boardman, Anthony E., David H. Greenberg, Aidan R. Vining, and David L. Weimer. Cost-Bene t Analysis: Concepts and Practice. 4 th ed., (Upper Saddle River, NJ: Pearson Prentice Hall, 2011). 1 You should also use your favorite Microeconomics textbooks as references. Additionally, reference will be made to other books from time to time, such as Boadway and Bruce (1984); Hanley and Spash (1993); Layard and Glaister (1994); Townley (1998); and Weimer and Vining (2005). Further references will be added during the term through the course website 2 Objectives of the course To enhance students analytical and intellectual skills through the study of Cost Bene t Analysis To improve students knowledge about Welfare Economics To equip the students with the skills needed to interpret and advise on basic cost-bene t analysis To improve students capacity to critically assess instances of public policy 1 You should be able to use an older edition, such as the third one, from 2006, without problems. 1

3 Expected learning results At the end of this course, you should be able to: understand the principles that inspire Welfare Economics, in particular the normative roots of the notion of economic e ciency understand the principles behind the theory of market failure interpret basic empirical examples of cost-bene t analysis and communicate the results to stakeholders critically assess the advantages and limitations of using cost-bene t analysis to inform public policy determine when a cost bene t analysis may be performed in a meaningful way and to perform basic project analyses identify limitations in modeling assumptions, data, or political concerns that may compromise the validity of a cost-bene t analysis study 4 Assessment The nal mark for the course comes from the coursework and the nal exam (Table 1). Table 1: Assessment summary date weight comments 3 quizzes MON Weeks 5, 8 and WED Week 10 45% Q1 20%; min(q2, Q3) 10%; max(q2, Q3) 15% Home assignments TBA 0% Not graded, but solutions will be provided In-class pop quizzes Not TBA 5% Essay WED Week 12 15% Final exam TBA 35% Quizzes will not be individually rescheduled. If you miss a quiz, the weight will be reallocated towards the nal exam. Late submissions of essays will be penalized at the rate of 5% per day. 5 Other policies Please e-mail me only from your MUN account Make sure you check your e-mail frequently (daily ideally) Make sure you check the website frequently (daily ideally). Many announcements pertinent to the course will only be on the website 2

6 Department of Economics Regulations: Students need to follow the MUN calendar for drop dates and deadlines It is not possible to drop a course once a student even sees a nal exam or writes the nal. Economics Department does NOT have Supplementary Exams. 6.1 Important Dates to Remember for 2012-2013 Winter Semester: January 7, 2013, Monday Lectures begin, Winter semester Deadline for fees payment, Winter semester Deadline for fees payment, undergraduate medical students, Winter semester January 15, 2013, Tuesday Final date for ling, with the Registrar, applications for Degrees and Diplomas for the Spring Convocation 2013. Applications received after this date will be processed as time and resources permit January 21, 2013, Monday End of Regular Registration Period and last day for undergraduate and graduate students to add courses, Winter semester Last day for undergraduate students to drop courses and receive a 100% refund of tuition fees, Winter semester January 28, 2013, Monday Last day for undergraduate students to drop courses and receive a 50% refund of tuition fees, Winter semester Final date for graduate students to withdraw from programs without incurring liability for tuition fees, Winter semester February 1, 2013, Friday Final date for ling undergraduate applications for admission/re-admission to Spring semester (14-week, Intersession and Summer session) 2013. Applications received after this date will be processed as time and resources permit February 4, 2013, Monday Last day for undergraduate students to drop courses and receive a 25% refund of tuition fees, Winter semester. No tuition fees are refunded for courses dropped after this date 3

February 18, 2013, Monday Winter semester break begins at St. John s Campus and Sir Wilfred Grenfell College February 21, 2013, Thursday Lectures resume at St. John s Campus and Sir Wilfred Grenfell College Final date for undergraduate and graduate students to drop courses without academic prejudice, Winter semester March 1, 2013, Friday Final date for ling undergraduate applications for admission/re-admission to Fall semester 2013. Applications received after this date will be processed as time and resources permit March 22, 2013, Friday Sessions end for Spring break for pre-clerkship medical students March 25, 2013, Monday Registration begins for eligible students registering in undergraduate courses, Spring semester (14-week courses, Intersession and Summer session) 2013 April 5, 2013, Friday Lectures end, Winter semester April 10, 2013, Wednesday Examinations begin, Winter semester Final date for submission of work reports by co-operative education students April 19, 2013, Friday Examinations end, Winter semester 6.2 Sick notes A sick note for deferred exams must contain the following: In the MUN Calendar under the General Academic University Regulations, Section 4 of the University Calendar 2008-2009 (page 53 - page 66) with attention to Information Required for Medical Certi cates. "The University requests that all medical notes be on letterhead from the doctor and be signed by the physician and include details on the following: Con rmation of the SPECIFIC DATES on which the student visited the physician 4

DOCTOR S COMMENTS: The degree to which the illness (or treatment, in the case of medication, for example) is likely to HAVE AFFECTED THE STUDENT S ABILITY to study, attends classes, or sit examinations DOCTOR S COMMENTS: the LENGTH OF TIME over which the student s abilities were likely hampered by the medical condition (e.g., recurring and severe back pain over a two-month period would likely have a more adverse e ect on studies than a single episode of back pain requiring bed rest for a week). DOCTOR S COMMENTS: The FITNESS OF THE STUDENT TO RESUME studies (it is in the student s best interest not to return to studies prematurely). " DOCTOR S COMMENTS: 5

7 Preliminary Course outline and suggested further reading This document shows the general contents of the course, and the sequence of topics. These will be broken down into a series of lectures for each topic. Chapters refer to the main course textbook. For more detailed and up to date information on the lectures schedule and further reading for each section, consult the on-line Course Schedule. NB: this list of topics is subject to alteration during the term. 1. Introduction to CBA and Welfare Economics. Chapter 1 (Arrow et al., 1996; Landsburg, 1993a, 1993b, 1993c ; Vining and Weimer, 1992) 2. Conceptual foundations of CBA: Welfare Economics Chapter 2 (Kelman, 1981; Landsburg, 1999; Kolstad, 2000, Ch. 3-4; Gowdy, 2004; Varian, 2003; Landsburg, 2007) 3. Basic Microeconomic foundations. Chapter 3 (Bator 1958; Willig, 1976; Hanemann, 1991; Samuelson, 1954, 1955; Knetsch and Sinden, 1984; Shogren et al., 1994; Becht, 1995; Varian, 2003 ; List, 2004; Hanley and Shogren, 2005) 4. Valuation of bene ts and costs in primary markets. Chapter 4 (Becker and Murphy, 1988; Sunstein, 2004; Tullock, 1967; Usher 1987; Caswell and Padberg, 1992; Cornes and Sandler, 1996; Arrow, 1997; Wessells, 2002; Weimer and Vining 2005, Ch. 8) 5. Valuation of bene ts and costs in secondary markets. Chapter 5 (Harberger, 1971) 6. Discounting the future. Chapter 6.(Layton and Levine, 2003 7. Existence Values. Chapter 9. (Krutilla, 1967; Common et al. 1997; Landsburg, 1999) 8. Direct Valuation. Chapter 13. 9. Indirect Valuation. Chapter 14. (Cesario 1976; Douglas and Johnson, 2004; Feather and Shaw, 1999; Earnhart, 2004; Englin and Shonkwiler 1995; Hagerty and Moeltner, 2005; Martinez-Espineira and Amoako-Tu our, 2008, 2009; Parsons, 2003; Randall, 1994) 10. Contingent Valuation. Chapter 15. (Arrow et al. 1993; Hanemann, 1994; Alberini et al. 1997; Boman et al. 1999; Nyborg, 2000; Carson et al. 2001; Bandara and Tisdell, 2004; Champ and Bishop, 2006; Akter et al., 2008) 6

11. Shadow Prices. Chapter 16 (Becker, 1968; Greenberg et al., 1997; Hensher 2001; Larson 1993; Cesario 1976; Douglas and Johnson, 2004; Feather and Shaw, 1999, Hammermesh, 1999; Landsburg 2004; Viscusi 2008; Amoako- Tu our and Martinez-Espineira 2012) 12. Cost-E ectiveness Analysis. Chapter 18. 13. Uncertainty. Chapter 7. (Cameron, 2005) References Akter, S., J. Bennett, and S. Akhter (2008). Preference uncertainty in contingent valuation. Ecological Economics 67 (3), 345 351. Alberini, A., M. Cropper, T.-T. Fu, A. Krupnick, J.-T. Liu, D. Shaw, and W. Harrington (1997). Valuing health e ects of air pollution in developing countries: The case of Taiwan. Journal of Environmental Economics and Management 34 (2), 107 126. Amoako-Tu our, J. and R. Martínez-Espiñeira (2012). Leisure and the net opportunity cost of travel time in recreation demand analysis: An application to Gros Morne National Park. Journal of Applied Economics 15 (1), 25 49. Arrow, K. J. (1997). Invaluable goods. Journal of Economic Literature 35 (2), 757 765. Arrow, K. J., M. L. Cropper, G. C. Eads, R. W. Hahn, L. Lave, R. G. Noll, P. Portney, M. Russell, R. Schmalensee, V. K. Smith, and R. N. Stavins (1996). Is there a role for bene t-cost analysis in environmental, health, and safety regulation? Science 272 (5259), 221 222. Arrow, K. J., R. Solow, P. Portney, E. Leamer, R. Radner, and H. Schuman (1993). Report of the NOAA panel on contingent valuation. Technical Report 58: 4601-4614, Federal Register. Bandara, R. and C. Tisdell (2004). The net bene t of saving the Asian elephant: A policy and contingent valuation study. Ecological Economics 48 (1), 93 107. Bator, F. M. (1958). The anatomy of market failure. Quarterly Journal of Economics 72 (3), 351 379. Becht, M. (1995). The theory and estimation of individual and social welfare mesaures. Journal of Economic Surveys 9 (1), 53 87. Becker, G. S. (1968). Crime and punishment: an economic approach. Journal of Political Economy 76 (2), 169 217. Becker, G. S. and K. M. Murphy (1988). A theory of rational addiction. Journal of Political Economy 96 (4), 675 700. available at http://ideas.repec.org/a/ucp/jpolec/v96y1988i4p675-700.html. 7

Boadway, R. and N. Bruce (1984). Welfare Economics. Oxford: Basil Blackwell. Boman, M., G. Bostedt, and B. Kriström (1999). Obtaining welfare bounds in discrete-response valuation studies - a non-parametric approach. Land Economics 75 (2), 284 294. Cameron, T. (2005). Individual option prices for climate change mitigation. Journal of Public Economics 89 (2-3), 283 301. Carson, R. T., N. E. Flores, and N. F. Meade (2001). Contingent valuation: Controversies and evidence. Environmental and Resource Economics 19 (2), 173 210. Caswell, J. A. and D. I. Padberg (1992). Toward a more comprehensive theory of food labels. American Journal of Agricultural Economics 74 (2), 460 468. Cesario, F. (1976). Value of time in recreation bene t studies. Land Economics 52, 32 41. Champ, P. A. and R. C. Bishop (2006). Is willingness to pay for a public good sensitive to the elicitation format? Land Economics 82 (2), 162 173. Common, M., I. Reid, and R. Blamey (1997). Do existence values for costbene t analysis exist? Environmental and Resource Economics 9, 225 238. Cornes, R. and T. Sandler (1996). The Theory of Externalities, Public Goods and Club Goods. Cambridge: Cambridge University Press. Douglas, A. J. and R. L. Johnson (2004). The travel cost method and the economic value of leisure time. International Journal of Tourism Research 6, 365 374. Earnhart, D. (2004). Time is money: Improved valuation of time and transportation costs. Environmental and Resurce Economics 29 (2), 159 190. Englin, J. and J. Shonkwiler (1995). Estimating social welfare using count data models: An application under conditions of endogenous strati cation and truncation. Review of Economics and Statistics 77, 104 112. Feather, P. and W. D. Shaw (1999). Estimating the cost of leisure time for recreation demand models. Journal of Environmental Economics and Management 38 (1), 49 65. Gowdy, J. M. (2004). The revolution in welfare economics and its implications for environmental valuation and policy. Land Economics 80 (2), 239 257. Greenberg, D. H., A. R. Vining, D. L. Weimer, and A. E. Boardman (1997). "plug-in" shadow price estimates for policy analysis. The Annals of Regional Science 31 (3), 299 324. Hagerty, D. and K. Moeltner (2005). Speci cation of driving costs in models of recreation demand. Land Economics 81 (1), 127 143. 8

Hamermesh, D. S. (1999). Crime and the timing of work. Journal of Urban Economics 109, 37 66. Hanemann, W. M. (1991). Willingness to pay and willingness to accept: How much can they di er? The American Economic Review 81 (3), 635 647. Hanemann, W. M. (1994). Valuing the environment through contingent valuation. The Journal of Economic Perspectives 8 (4), 19 43. Symposia: Contingent Valuation. Hanley, N. and J. Shogren (2005). Is cost-bene t analysis anomaly-proof? Environmental and Resource Economics 32 (1), 13 24. Hanley, N. and C. L. Spash (1993). Cost-Bene t Analysis and the Environment. Cheltenham: Edward Elgar. Harberger, A. (1971). Three basic postulates for applied welfare economics: An interpretive essay. Journal of Economic Literature 9 (3), 785 797. Hensher, D. (2001). Measurement of the valuation of travel time savings. Journal of Transport Economics and Policy 35 (1), 71 98. Kelman, S. (1981). Cost-bene t analysis: An ethical critique. Journal of Government and Society Regulation 5 (1), 33 40. http://www.freewebs.com/philosophyisprettyneato/cost1.pdf. Knetsch, J. L. and J. A. Sinden (1984). Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. The Quarterly Journal of Economics 99 (3), 507 521. Kolstad, C. (2000). Environmental Economics. New York: Oxford University Press. Krutilla, J. V. (1967). Conservation reconsidered. The American Economic Review 57 (4), 777 786. Landsburg, S. E. (1993a). Choosing sides in the drug war: How the Atlantic Monthly got it wrong. In S. E. Landsburg (Ed.), Armchair Economist: Economics and Everyday Life, pp. 95 105. New York: Free Press. Landsburg, S. E. (1993b). The policy vice: Do we need more illiterates? In S. E. Landsburg (Ed.), Armchair Economist: Economics and Everyday Life, pp. 95 105. New York: Free Press. Landsburg, S. E. (1993c). Why I am not an environmentalist: The science of economics versus the religion of ecology. In S. E. Landsburg (Ed.), Armchair Economist: Economics and Everyday Life. New York: Free Press. Landsburg, S. E. (1999). Is everybody happy? The cost-bene t analysis of making folks smile. Slate Magazine. Posted Tuesday, Nov. 9, 1999, at 3:30 AM ET http://www.slate.com/id/46376/. Landsburg, S. E. (2004). Feed the worms who write worms to the worms: The economic logic of executing computer hackers. Slate Magazine. Posted Wednesday, May 26, 2004, at 5:14 PM ET. http://www.slate.com/id/2101297/. 9

Landsburg, S. E. (2007). The theory of the leisure class an economic mystery: Why do the poor seem to have more free time than the rich? Slate Magazine. Posted Friday, March 9, 2007, at 1:23 PM ET http://www.slate.com/id/2161309/. Larson, D. M. (1993). Separability and the shadow value of leisure time. American Journal of Agricultural Economics 75 (3), 572 577. Layard, R. and S. Glaister (1994). Cost-Bene t Analysis, Second Edition. Cambridge, UK: Cambridge University Press. Layton, D. and R. Levine (2003). How much does the far future matter? a hierarchical bayesian analysis of the public s willingness to mitigate ecological impacts of climate change. Journal of the American Statistical Association 98, 533 544. List, J. A. (2004). Substitutability, experience, and the value disparity: Evidence from the marketplace. Journal of Environmental Economics and Management 47 (3), 486 509. Martínez-Espiñeira, R. and J. Amoako-Tu our (2008). Recreation demand analysis under truncation, overdispersion, and endogenous strati cation: An application to Gros Morne National Park. Journal of Environmental Management 88 (4), 1320 1332. Martínez-Espiñeira, R. and J. Amoako-Tu our (2009). Multi-destination and multi-purpose trip e ects in the analysis of the demand for trips to a remote recreational site. Environmental Management 43 (6), 1146 1161. Nyborg, K. (2000). Homo Economicus and Homo Politicus: Interpretation and aggregation of environmental values. Journal of Economic Behavior and Organisation 43, 305 322. Parsons, G. R. (2003). The travel cost model. In P. A. Champ, K. J. Boyle, and T. C. Brown (Eds.), A Primer on Nonmarket Valuation, Chapter 9. London: Kluwer Academic Publishing. Randall, A. (1994). A di culty with the travel cost method. Land Economics 70 (1), 88 96. Samuelson, P. A. (1954). The pure theory of public expenditure. The Review of Economics and Statistics 36 (4), 387 389. Samuelson, P. A. (1955). Diagrammatic exposition of a theory of public expenditure. The Review of Economics and Statistics 37 (4), 350 356. Shogren, J. F., S. Y. Shin, D. J. Hayes, and J. B. Kliebenstein (1994). Resolving di erences in willingness to pay and willingness to accept. The American Economic Review 84 (1), 255 270. Sunstein, C. R. (2004). Lives, life-years, and willingness to pay. Columbia Law Review 104 (1), 205 252. Townley, P. (1998). Principles of Cost-Bene t Analysis in a Canadian Context. Toronto: Prentice Hall. 10

Tullock, G. (1967). The welfare costs of tari s, monopolies and theft. Economic Inquiry 5 (3), 224 232. Usher, D. (1987). Theft as a paradigm for departures from e ciency. Oxford Economic Papers 39 (2), 235 252. Varian, H. (2003). Intermediate Economics, A Modern Approach (6th ed.). New York: Norton. Vining, A. R. and D. L. Weimer (1992). Welfare economics as the foundation for public policy analysis: Incomplete and awed but nevertheless desirable. The Journal of Socio-Economics 21 (1), 25 37. Viscusi, W. (2008). How to value a life. Journal of Economics and Finance 32 (4), 311 323. cited By (since 1996) 6. Weimer, D. L. and A. R. Vining (2005). Policy Analysis: Concepts and Practice. Englewood Cli s, N.J.: Pearson Prentice-Hall. Wessells, C. R. (2002). The economics of information: Markets for seafood attributes. Marine Resource Economics 17 (2), 153 162. Willig, R. D. (1976). Consumer s surplus without apology. The American Economic Review 66 (4), 589 597. 11